SEC Charges Affiliated Advisers for Misrepresentations About Payment for Order Flow Arrangements

The Securities and Exchange Commission today filed settled charges against affiliated registered investment advisers WBI Investments Inc. and Millington Securities Inc. for making material misrepresentations to clients about compensation Millington received in an institutional payment for order flow arrangement for routing client orders to certain brokerage firms for execution.  As part of the settlement, WBI and Millington agreed to pay a combined total of $1 million in penalties.

According to the SEC’s order, WBI and Millington served as advisers to a series of mutual funds and a series of exchange-traded funds, among other clients.  The order finds that Millington, which also served as WBI’s primary introducing broker, agreed to route WBI’s client orders to certain brokerage firms that agreed to pay Millington amounts they characterized as “payments for order flow.”  According to the order, the payments to Millington were $0.0125 to $0.0150 per share.  The order further finds that, in general and over time, the brokerage firms executing WBI’s client trades adjusted the execution prices by $0.02 to $0.03 per share higher for client buy orders and lower for client sell orders.  According to the order, Millington and the brokerage firms mutually understood that the adjusted execution prices allowed the brokerage firms to recoup their payments to Millington and generate profits.  The order finds, however, that on at least three occasions, WBI and Millington falsely assured the boards of the mutual funds and the ETFs that these institutional payment for order flow arrangements did not adversely affect the funds’ execution prices.    

“WBI and Millington made misleading statements to their institutional clients about a conflict of interest,” said Joseph G. Sansone, Chief of the Enforcement Division’s Market Abuse Unit.  “Investment advisers must exercise diligence in their correspondence and avoid providing clients with false comfort about payment for order flow arrangements.”

The SEC’s order finds that WBI and Millington violated Section 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder.  Without admitting or denying the findings, WBI and Millington consented to the entry of a cease-and-desist order and censures.  Under the order, WBI will pay a penalty of $750,000, and Millington will pay a penalty of $250,000.

The SEC’s investigation was conducted by Vanessa De Simone and Simona Suh of the Market Abuse Unit with the assistance of John Marino.  The investigation was supervised by Mr. Sansone.  The SEC’s examinations that led to the investigation were conducted by Hitan Patel, Paul Eberhard, Illan Felix, Michael Fioribello, Steven Vitulano, Christina Camardo, Kevin Rush, Barry Simmons, Azam Riaz, Katherine Feld, and Raymond Slezak of the Office of Compliance Inspections and Examinations (OCIE) with supervision from Thomas Butler.  Additional assistance was provided by Daniel Tempone of OCIE.